Company Perspectives:

For a service company like Alitalia, the frontier to which resources must be dedicated daily is the satisfaction of the individual customer, with a very precise objective: to motivate his choice, offering him a competitive service which best meets his specific requirements. To respond to these new market conditions and, where possible, anticipate the trends, calls for a flexible organisation which permits instant and precise actions to be taken to efficiently meet the requirements of the market.

Company History:

Alitalia-Linee Aeree Italiana, S.p.A is the national airline of Italy. It has been consistently working to transform itself into a modern, low-cost airline. Alitalia has more than 20 partner airlines; in 1998 the carrier teamed with KLM Royal Dutch Airlines in a strategic alliance with far-reaching implications. The Italian government was scheduled to divest its holdings in Alitalia entirely by 2000.

Roman Origins

Alitalia was established in September 1946 as Alitalia-Aerolinee Italiana Internazionali, with British financial assistance consisting of an initial capital investment of L900 million and an additional investment of L1.5 billion by the start of 1947. The company began operations in the spring of that year with two three-engine Fiat G.12s flying routes from Turin to Rome and from Rome to Catania.

During its first year of operation Alitalia expanded its airliner inventory through the acquisition of two G.12s, four Siai Marchetti SM.95s, and three Avro Lancastrians; by year's end it had transported a total of 10,306 passengers and 110 tons of cargo. Furthermore, in its first year of scheduled air services, the airline covered a network of over 9,000 kilometers and employed just under 300 personnel, 55 of whom were flight crew. By 1948 the airline was able to offer its first intercontinental service, introducing flights from Rome to Buenos Aires, and by 1950 it had substantially modernized its fleet with the addition of Douglas DC-4s and DC-3s. Expansion continued throughout the 1950s; by the tenth anniversary of the airline in 1956, its planes had traveled a total of 48,630 kilometers and had transported a total of 116,394 passengers. The number of employees had risen to 1,120 and the company's capital to L4.5 billion.

Major Merger in 1957

In 1957 Alitalia-Aerolinee Italiana Internazionali merged with Linee Aeree Italiana (LAI), a regional operator 40 percent owned by the U.S. airline Trans World Airways (TWA), to become Alitalia-Linee Aeree Italiana, SpA, the single Italian domestic and international airline. The merger helped to centralize air transport operations in Italy, and the new entity was able to compete more effectively with other national carriers in Europe. The new company was also substantially larger, with a net capital of L10 billion, an expanded network, and a staff of over 3,000. By the end of 1957 over 478,000 passengers had been carried by the fleet which had been expanded to include Convair-Metropolitans and Viscount 785s.

The year of the Rome Olympics, 1960, was a milestone for Alitalia. Chosen as the official carrier for the games, the company introduced its first jet airliners: French-made Caravelle SE210s, which served medium-haul routes, and larger DC-8s, which were put into service on the intercontinental routes. These additions to the Alitalia inventory helped the airline achieve its goal of carrying one million passengers in one year. One year later, to facilitate the airline's expansion, company headquarters was moved from Ciampino to the recently completed Leonardo da Vinci International Airport at Fiumicino. In 1967, the same year that it introduced its new tricolored "A" on the tail fins of its aircraft, Alitalia purchased several DC-9s for its medium-haul routes in Europe and the Middle East. The following year, with the retirement of the aging Viscount turboprop powered aircraft, Alitalia had completed its transformation into an all-jet fleet consisting of 19 DC-8s, 24 DC-9s, and 19 Caravelles.

During this period, dramatic developments were taking place in aircraft manufacturing. In 1969 Boeing introduced the Boeing 747 "jumbo jet," an aircraft that had virtually twice the passenger capacity of the other aircraft, promising an increase in revenue for the airlines. Alitalia placed an order with Boeing and received its first 747 in May 1970. The aircraft was immediately put to work on high density long-haul routes. In 1973 Alitalia expanded its wide-bodied fleet and took delivery of its first 275-seat DC-10/30.

A Decade of Crisis: 1970s

During the 1970s Alitalia experienced increasingly difficult financial circumstances. The price of crude oil quadrupled, the western economies entered a period of recession, and airlines experienced a sharp decrease in demand. For Alitalia, as well as its competitors, one solution was to furnish its fleets with more fuel-efficient aircraft. Alitalia's gas-guzzling DC-8s and Caravelles were replaced by more efficient Boeing 727s, the first of which was put into service in 1976. Inflation and political instability in Italy during the latter half of the decade left the airline facing large debts, persistent losses, and falling revenues.

By 1980, despite the partial re-equipment program of the past few years, the airline's fleet had become outdated and inefficient; the average age of their aircraft ranged from six to eight years, generally older than those of the company's European competitors. In 1982 the company was able to order McDonnell Douglas Super 80s to replace the aging Boeing 727s on medium-haul routes and also made plans to purchase more Boeing 747s to replace their fleet of DC-10s, the safety of which had been questioned following several accidents involving other airlines.

In order to maximize its potential for profit, Alitalia began to diversify its business interests by creating separate support companies that would provide travel services and information. These companies included Societa Italiana Gestione Sistemi Multi Accesso (SIGMA), which focused on the development and management of information services in the tourist sector, Italiatour, developed to promote tourism in Italy, and Alidata, a software marketing company.

Also during this time, Alitalia went through a substantial restructuring at the hands of Luciano Sartoretti, the managing director of finance. By 1986 Sartoretti had trimmed and reshaped the company's debts. In 1987 Alitalia returned a profit of over L73 billion following a period that had seen a healthy expansion across much of the European airline business. Nevertheless, the airline still faced several problems. First, although the company's performance was considered adequate, it was losing market share--both within Europe and on the transatlantic routes&mdashø its closest rivals, Air France and Lufthansa A.G. of West Germany. These two competitors had been pursuing aggressive expansion plans through major re-equipment programs and allowing for greater passenger capacity on profitable routes. Alitalia, however, had spent the past five years diversifying its interests and had failed to expand its fleet of about 123 aircraft. Alitalia was therefore less able to benefit from a number of generally profitable years in the airline business in the 1980s.

Late 1980s Labor Unrest

Beginning in September 1987 Alitalia was plagued by a series of disruptive strikes by pilots, cabin staff, and ground crew--an occurrence some thought reflected both senior management's inability to deal effectively with its employees and a general weakness in their long-term planning. The following year, in an attempt to resolve some of its structural problems and intractable disputes, Alitalia recruited Carlo Verri from the executive committee of the Swedish group Electrolux A.B. The appointment of Verri, a businessperson from the private sector with no previous experience in the airline business, was designed to provide Alitalia with free market know-how and top management expertise. His primary concerns were to resolve the chronic labor problems and to develop a long-term growth strategy. By May 1989, Verri had reached an agreement with the cabin crew which ran for 20 months, and in July of the same year he reached a four-year agreement with the pilots. In October he announced a plan to finance a long-term re-equipment program for both aircraft and ground equipment. Verri's plans for the rejuvenation of Alitalia, however, were brought to an abrupt end in November 1989, when he was killed in an automobile accident.

Despite Alitalia's losses from the interruption of its Mediterranean and Middle East routes during the war in the Persian Gulf in 1991, and despite its reputation for, in the words of Forbes writer Peter Fuhrman, "slovenly service, poisonous labor relations, and antiquated equipment," the airline experienced some financial recovery in the early 1990s. Aggressive marketing and competitive pricing in 1991 resulted in unexpectedly good results, including a 5.3 percent growth in its cargo operations against an average decrease of 2.7 percent for other European national carriers. Alitalia briefly participated in an innovative "air bridge," shipping bodies for the short-lived Cadillac Allanté from Turin to Detroit. Demand from India was expected to create the most growth for freight services.

Although sales rose by eight percent in 1991, Alitalia posted a loss like everyone else in the business during one of the industry's most catastrophic years. Alitalia relocated its headquarters to a new office complex outside Rome in 1991. At this time, the airline employed nearly 20,000; the group as a whole employed nearly 30,000.

In March 1992 Alitalia announced an ambitious five-year investment plan calling for an allocation of over L4.4 trillion for expansion of the Alitalia fleet to 165 aircraft. The plan also called for the purchase of five new planes for intercontinental routes and 14 more for operations within Europe. According to Alitalia chief executive Giovanni Bisignani, the expansion plan--at a time of retrenchment in the international airline business--was designed to enable the company to survive by "moving to achieve a critical mass, but staying fast and flexible."

Alitalia entered into an equity partnership with Hungarian carrier Malév in December 1992. The US$77 million investment gave 30 percent of Malév shares to Alitalia and five percent to SIMEST S.p.A., an Italian government unit. The expectation was to develop Budapest's role as a gateway between Eastern and Western Europe. The two airlines together served 122 cities on five continents.

The carrier lost US$203 million in 1993. Lean and effective competition from British Airways and KLM forced incoming CEO Roberto Schisano to cut about 1,500 jobs at Alitalia. The company struggled with debts of US$1.8 billion. On the plus side, Alitalia inked a quite lucrative marketing deal with U.S.-based Continental Airlines in May 1994.

In November 1995, an ambitious regional start-up began competing with Alitalia on the Milan-Rome route. Air One was one of many budget carriers launched on the wings of the economical Boeing 737, although it was the first operator of that type in Italy.

The new entrants, which also included AZZURRAair and Air Sicilia, lacked Alitalia's access to government subsidies (although AZZURRA was to become a franchisee of Alitalia). European Union (EU) commissioners, eager to promote a free market, were beginning to place a great deal of scrutiny on bailouts. Tense negotiations resulted in a L2.75 billion recapitalization in 1997, pared from L3.3 billion. As conditions for its approval, the EU required Alitalia to divest various holdings, including its stake in Malév. The airline also had to trim operations and lay off another 1,200 employees.

Domenico Cempella was named managing director and CEO after Schisano departed in 1995. He and chairman Fausto Cereti succeeded in wringing productivity concessions for the unions in return for some equity. Part of their recovery package included forming Alitalia TEAM, a sister company to hire "B"-scale workers. The regional subsidiary Alitalia Express was also formed. After losing US$683 million in 1996, Alitalia posted its first profit (L438 billion, US$243 million) in nine years in 1997.

The KLM-Alitalia alliance was expected to capture 20 percent of the European passenger market by 2001, more than doubling each carrier's respective market share. Since KLM also had a close alliance with Northwest Airlines, and Alitalia an agreement with Continental, the global implications ran deep as the United States and Italy neared agreement on an "open skies" agreement.

The alliance proved that Alitalia still had considerable clout left among world airlines. Alitalia's profit of L539 billion on L9.08 trillion in 1998 revenue demonstrated it was on the right track management-wise. Alitalia continued to invest in marketing and equipment in order to capture a larger market share. The airline was planning to implement a SABRE yield management system in 1999. In 1998 the state holding company, Istituto per la Recostruzione Industriale, owned 53 percent of Alitalia shares and was scheduled to divest its holdings entirely by 2000.